Required Minimum Distributions Reminder for Deferred Compensation 457(b) Plans for Tax-exempt Co-ops
The Internal Revenue Code (IRC) requires plan participants to receive a certain portion of their deferred compensation 457(b) Plan accounts each year based on the life expectancy of the participant (or the joint lives of the participant and beneficiary) when they either (a) are no longer employed and reach age 70½, or (b) retire after reaching age 70½. These withdrawals are called required minimum distributions.
The required minimum distribution rules apply to all employer-sponsored retirement plans, including profit-sharing plans, 401(k) plans, defined benefit plans, and the following 457(b) plans:
- Executive Compensation 457(b) Plans
- Global Executive Compensation Plans
- Governmental Deferred Compensation 457(b) Plans
Take time to verify any action required
You can help your former employees and directors participating in your co-op’s 457(b) Plan by checking their ages and contacting them if they reach age 70½ in 2018. Participants should contact their personal financial and/or tax advisors for help in determining the amount of their required minimum distribution.
Generally, required minimum distributions must be withdrawn by December 31 of each tax year until the account has been paid out. However, a participant’s initial required minimum distribution can be deferred until April 1 of the year after they reach age 70½. If they delay taking the RMD until April 1 of next year, the participant will be taking two required minimum distributions during the same tax year. The combined amount may put them in a higher tax bracket, and a potentially increased tax obligation.
Important reminder: Failure of the participant to take a withdrawal of the minimum amount required could result in a penalty equal to 50% of the difference between the required minimum distribution amount and any amount distributed or withdrawn from an individual’s account.
In the event of the death of participant
If a participant dies before the full value of the account has been paid, the election made by the participant on their beneficiary election form, along with the plan document materials, will determine payment of the required minimum distribution to the participant’s beneficiaries. If there is no designated beneficiary living when the participant dies, their estate shall be paid the amount in the account in the form of a single cash payment.
Tip: Some participants do not turn in their beneficiary election form when they begin participating in the 457(b) Plan. Be sure to check your files to confirm that you have the beneficiary election form for each plan participant.
Not sure of your co-op’s tax status? If your co-op files IRS Form 990, Return of Organization Exempt from Income Tax, your co-op is tax exempt. Your accounting department can tell you if your co-op files this form.
Questions?
Please contact the Deferred Compensation Program team by email at deferredcomp@nreca.coop or by phone at 703.907.6375.